Monopolistic Competition and the Illusion of Variety

Economic Principle: Monopolistic Competition & Horizontal Differentiation

In the current landscape of online commerce, the clothing and lifestyle market is saturated with countless brands that seem different, but often market basically the same products. This rise of micro-brands, fueled by Shopify, Etsy, and TikTok Shop, exemplifies monopolistic competition: many firms sell differentiated products and no firm has substantial market power. Although consumers enjoy an endless array of “choices,” more often than not this “choice” is due to marketing, not manufacturing.

Branding Over Production

All firms that operate under monopolistic competition differentiate their products through some characteristic of the product, such as design, reputation, or customer experience. The differentiation is horizontal, not vertical, in contemporary apparel — this means that the goods will be similar in quality, but will differ in style or presentation.

Now thousands of 'brands' are really just marketing stickers for the same production framework. Many rely on white-label and/or private-label relationships that have the factories doing the design, pattern and production, and only customizing to the surface for the brand owner. A new entrepreneur can start an 'original' clothing label by either uploading a logo or selecting a logo from the various templates that suppliers offer — even specialty custom underwear manufacturers that offer supplied technical patterns along with material sourcing or production capacity.

So formally, this decouples the ownership of the brand from the actual creation of the good itself, which means that entry into the market is available for anyone often with modest levels of capital. Increased access to entry reduces barriers and increases the number of sellers of new brands, but this does not always equate to increasing true diversity of the product offered.---

The Illusion of Variety

Monopolistic competition has both positive and negative implications from a welfare perspective. Proponents of this structure suggest that greater product differentiation allows consumers to find goods that better meet their preferences, resulting in greater utility. However, if differentiation happens mostly through marketing and not through production, the benefits of such conveniences are of a more psychological nature than a material one.

According to the Shopify 2024 Merchant Trends report, the company now powers more than 5.5 million stores worldwide. The vast majority of these stores operate under virtually identical supply chains and identical catalogues, sourcing from a small number of OEM (Original Equipment Manufacturer) hubs in China, Vietnam, or Turkey. For example, textile data solicited by the World Trade Organization shows that small e-commerce brands responsible for over 70% of total imported apparel come from fewer than 500 export factories worldwide producing relatively indistinguishable garments.

What appears to be variety at the point of sale - hundreds of different “unique” sweatshirts, leggings, or “ethical” minimalist T-shirts - is actually simply multiple instances of mass customization layered on top of the mass-producedbase good. The average consumer is not choosing between dramatically different fabrication or production techniques, but rather simple stories and aesthetics.---

Digital Platforms and Amplified Differentiation

Digital platforms have accelerated this illusion. Shopify makes branding easy, and Etsy turns “handmade” into a commodity, while TikTok Shop contributes viral marketing and instant delivery to consumers. The net effect has been a feedback loop: new entrants rush to market, seeking to identify and capture micro-niches organized by some appeal to taste, identity, or meme culture while suppliers have converted their production system to facilitate that infinite demand for “newness.”

From an efficiency view, this is efficient, as it signals differentiated demand with a modular supply. But it's deceiving. As competition shifts from production to perception, the bundled cost structure for the industry is weighted heavily to advertising, influencer rates, creative talent, and nicely executed aesthetic. Thus, cost of marketing, as opposed to innovating proxy value on the product, is the next competitive lever.---

Welfare and Structural Implications

The appearance of variety has significant welfare and policy implications. Consumers are more satisfied with a perception of choice, even if the products being compared are all the same. Additionally, we can waste resources promoting new brands or digital marketing that do not really enhance the product quality.

A similar market dynamic applies to Edward Chamberlin’s early 20th-century account of monopolistic competition: inefficiency due to excess capacity. Too many firms pursue too few truly new ideas. We see, in a way, a global fragmentation of branding, whereby each “firm” provides little productive value, but they compete with each other for attention on social media.---

Why It’s Happening

The change is driven by three forces:

Declining transaction and coordination costs: Platforms and payment processors eliminate many of the distribution barriers that have traditionally constrained small firms while outsourcing logistics and production.

Globalized supply networks: Using shared factories and digital catalogs of products lowers marginal costs of entry and also allows for quick turnaround times to refresh product assortment.

Behavioral economics of identity consumption: Consumers are more willing to purchase brands that deliver status or lifestyle cues, regardless of minimal functional differences.---

Conclusion

The proliferation of micro-brands and white-label manufacturing represents a form of monopolistic competition in its purest, digital form - a marketplace of unlimited product differentiation built on uniform products and businesses. Platforms that enable this ecosystem democratize entrepreneurship, while blurring the lines between true innovation and replication.

When "choice" is a function of brands rather than production, the economy rewards persuasion as much as it does creation. The illusion of choice may delight consumers in the moment, but it begs a much deeper question for economists and policymakers alike: is the global marketplace creating more value, or more varieties of the same T-shirt?